Are Cash Liquidation Distributions Taxable?

When a corporation liquidates its assets in part or in entirety, the corporation may issue liquidating distributions, also known as liquidating dividends, to its stockholders. A corporation may render noncash liquidating distributions, cash liquidating dividends or both. The Internal Revenue Service requires a recipient of a cash liquidating distribution to record the amount he receives on Line 8 of Form 1099-DIV. For the IRS to view a cash liquidating distribution as taxable to its recipient, the amount received must exceed the taxpayer's basis in the corporation's stock.

If a person's basis is less than the amount he receives as a cash liquidation distribution, the IRS views the difference as taxable.

Basis

In general, a stockholder's basis equals the amount he pays to acquire stock in a corporation, including commissions and related fees. If a person assumes ownership of stock through means other than purchasing it, the IRS provides guidelines for determining the individual's basis in the stock in IRS Publication 550. If, for instance, a taxpayer receives stock as the result of an inheritance, the IRS usually requires the recipient to assume the fair market value of the stock at the time of the deceased's death as his basis in the stock. If, on the other hand, a person receives stock as payment for services, the IRS requires him to claim the fair market value of the stock as income and assume the amount claimed as his basis in the stock.

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Gains vs. Losses

A corporation may render cash liquidating distributions in one or more installments. If the total amount received by a stockholder exceeds the taxpayer's basis in the corporation's stock, he records a capital gain on his federal taxes. If a person receives cash liquidating distributions that equal a sum that is less than his basis in the corporation's stock, he records a capital loss.

Short-Term or Long-Term

The length of time a taxpayer owns the stock issued by the liquidating corporation determines whether he records his capital gain or loss as short-term or long-term on his federal taxes. A person's holding period begins the day after he acquires stock in a corporation and ends the day after he receives payment, or a final liquidation distribution, for the stock. If a taxpayer holds a stock for one year or less, the IRS considers his capital gain or loss as short-term. If a person's holding period exceeds one year, the IRS views his capital gain or loss as long-term.

Multiple Acquisitions

If a taxpayer purchased stock in a corporation in several separate transactions and the corporation decides to completely liquidate its assets, the IRS requires the stockholder to spread any cash liquidation distributions over each of the different blocks of shares he owns. In other words, the taxpayer must divide the number of shares he purchased in each transaction by the total number of shares he owns to determine the amount of his capital gain or loss. If the corporation decides to only partially liquidate its assets instead, the IRS requires the same stockholder to apply the amount he receives as a cash liquidation distribution against only the set of shares he wishes to redeem in exchange for the distribution.